Asset: Definition & Types

KEY TAKEAWAYS

• An asset is anything that has value and can be used to generate revenue.
• There are 4 main types of assets: current, fixed, financial, and intangible.
• Asset type matters since it provides insights into a company’s financial health.
• Assets are used in accounting to measure a company’s financial performance. They are used to calculate income and expenses as well as net worth.

What Is an Asset?  

An asset is something that an individual, business, corporation, or country owns or controls. There’s an expectation that when assets are owned they’ll provide some type of future benefit. 

They get reported on your company’s balance sheet and are typically purchased to increase business value. They can also get purchased in the hopes that they will benefit future operations. 

Assets can be wide-ranging and get used in a handful of ways; for example, they can generate cash flow, improve sales, or reduce expenses. Assets need to be controlled by whoever owns them, giving owners certain legal rights and to be able to use the asset accordingly. 

As well, assets must have some sort of value. This means that the owner will receive some type of future benefit from it. For example, it could be an increase in cash flow, revenue, or future earnings.

What Are the Different Types of Assets? 

Depending on the business you conduct and the industry you’re in, some assets can vary. But no matter the industry, assets will still get organized into categories based on classifications, type, and function. 

Here are some of the different types of assets:

Convertibility Classification

Current Assets – Current assets can get converted into cash within 1 year. This can be common with businesses that need to have a lot of cash on hand. In this case, they will often classify liquid assets as current assets. These can include things like accounts receivable, cash, and inventory on hand. 

Fixed Assets – On the flip side, fixed assets are more long-term capital assets. These will typically be things such as buildings, plants, and equipment. Making adjustments for aging assets gets done through depreciation expenses. 

There are two methods of depreciation in the generally accepted accounting principles (GAAP). The first is the straight-line method, which assumes fixed assets lose value evenly throughout their useful life. The second is the accelerated method, which assumes the asset is going to lose value quickly.

Physical Existence Classification 

Tangible Assets – These assets have a physical representation. Typically, some of the most common tangible assets will include things such as cash, inventory, buildings, vehicles, equipment, and investments. Financial investments can be things like corporate bonds, stocks, preferred equity, and hybrid securities.

Intangible Assets – These are a class of assets that aren’t going to have any kind of physical presence. Intangible assets will get accounted for differently depending on the specific type.

They can also get tested for impairment or amortized every year. Common examples of intangible assets include things like copyrights, patents, goodwill, and trademarks.

Usage Classification 

Operating Assets – If a company has any assets that are part of a typical day-to-day operation, they’re going to be considered as operating assets. These can include assets like accounts receivable, cash, machinery, patents, and even copyrights. 

Non-Operating Assets – On the flip side of operating assets, non-operating assets aren’t part of a company’s primary operations. For example, unused land, investment securities, and spare equipment don’t play a role in the operations of a company. Yet, they’re still considered assets.

How Are Assets Used in Accounting? 

Assets get used to help measure the financial performance of a company. They’re used to calculate everything from income to expenses. Assets can also be used to help determine the net worth of a company. This is done by subtracting the total liabilities of a company from the total assets. These insights can be a good way to determine how much money would be left if everything was liquidated.

Summary

Some businesses are going to have different assets compared to others. But regardless of the industry, assets can play a big role in a company’s success. They can help generate more cash flow, increase sales, and limit expenses. 

The most common types of assets are current and noncurrent assets, fixed, financial, and intangible. Make sure that you follow rules from regulatory agencies to keep a fair market and avoid business risks. This also helps to limit the risks to consumers and financial markets as a whole.

It’s important to recognize that an asset must be owned and controlled to have certain legal rights, and needs to have some sort of value. This means that whoever owns the asset will receive some type of future benefit.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.